QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38594

Tilray, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

82-4310622

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1100 Maughan Road

Nanaimo, BC, Canada, V9X IJ2

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (844) 845-7291

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class 2 Common Stock, $0.0001 par value per share

TLRY

The Nasdaq Global Select Market

As of May 15, 2019, the registrant had 16,666,667 shares of Class 1 Common Stock, $0.0001 par value per share, and 80,564,387 shares of Class 2 Common Stock, $0.0001 par value per share, outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

TILRAY, INC.

Condensed Consolidated Statements of Net Loss and Comprehensive Loss

(in thousands of U.S. dollars, except for share and per share data, unaudited)

Three months ended March 31,

2019

2018

Revenue

$

23,038

$

7,808

Cost of sales

17,653

3,912

Gross margin

5,385

3,896

General and administrative expenses

12,797

4,145

Sales and marketing expenses

7,821

2,263

Depreciation and amortization expense

1,863

222

Stock-based compensation expense

5,306

31

Research and development expenses

1,048

975

Acquisition and integration expenses

4,424

—

Operating loss

(27,874

)

(3,740

)

Foreign exchange loss, net

179

1,146

Interest expense, net

8,745

416

Finance income from ABG Profit Participation Arrangement

(135

)

—

Other income, net

(2,345

)

(121

)

Loss before income taxes

(34,318

)

(5,181

)

Deferred income tax recovery

(3,777

)

—

Current income tax recovery

(240

)

—

Net loss

$

(30,301

)

$

(5,181

)

Net loss per share - basic and diluted

(0.32

)

(0.07

)

Weighted average shares used in computation of net loss per share

- basic and diluted

94,875,351

75,000,000

Net loss

$

(30,301

)

$

(5,181

)

Foreign currency translation loss

(475

)

(1

)

Unrealized gain on cash equivalents and investments

1,408

—

Other comprehensive income (loss)

933

(1

)

Comprehensive loss

$

(29,368

)

$

(5,182

)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

TILRAY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands of U.S. dollars, except for share data, unaudited)

Convertible preferred

shares

Common stock

Number of

shares

Amount

Number of

shares

Amount

Additional

paid-in

capital

Accumulated

other

comprehensive

income

Accumulated

deficit

Total

equity

(deficit)

Balance at December 31, 2017

—

$

—

—

$

—

$

31,736

$

3,866

$

(40,454

)

$

(4,852

)

Convertible preferred stock issued, net of

issuance costs

7,794,042

1

—

—

52,639

—

—

52,640

Common stock issued

—

—

75,000,000

8

—

—

—

8

Stock-based compensation expense

—

—

—

—

31

—

—

31

Other comprehensive loss

—

—

—

—

—

(1

)

—

(1

)

Net loss

—

—

—

—

—

—

(5,181

)

(5,181

)

Balance at March 31, 2018

7,794,042

$

1

75,000,000

$

8

$

84,406

$

3,865

$

(45,635

)

$

42,645

Balance at December 31, 2018

—

$

—

93,170,867

$

10

$

302,057

$

3,763

$

(108,177

)

$

197,653

Shares issued for Natura acquisition

—

—

180,332

—

15,100

—

—

15,100

Shares issued for Manitoba Harvest

acquisition

—

—

1,209,946

—

96,844

—

—

96,844

Shares issued for ABG Profit Participation

Arrangement

—

—

1,680,214

—

125,097

—

—

125,097

Receivable for ABG Profit Participation

Arrangement, net of finance income

—

—

—

—

(30,292

)

—

—

(30,292

)

Shares issued under stock option plans

—

—

545,000

—

931

—

—

931

Shares issued for employee compensation

11,868

—

649

—

—

649

Stock-based compensation expense

—

—

—

—

5,306

—

—

5,306

Other comprehensive income

—

—

—

—

—

933

—

933

Net loss

—

—

—

—

—

—

(30,301

)

(30,301

)

Balance at March 31, 2019

—

$

—

96,798,227

$

10

$

515,692

$

4,696

$

(138,478

)

$

381,920

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

TILRAY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands of U.S. dollars, unaudited)

Three months ended March 31,

2019

2018

Operating activities

Net loss

$

(30,301

)

$

(5,181

)

Adjusted for the following items:

Foreign currency (gain) loss

(214

)

1,099

Provision for doubtful accounts

536

—

Depreciation and amortization expense

2,770

479

Stock-based compensation expense

5,306

31

Non-cash interest (income) expense

(322

)

276

Loss on disposal of property and equipment, net

111

—

Deferred taxes

(3,777

)

—

Amortization of discount on Convertible Notes

2,501

—

Changes in non-cash working capital:

Accounts receivable

3,030

(118

)

Other receivables

—

(360

)

Inventory

(12,983

)

(1,259

)

Prepaid expenses and other current assets

(2,143

)

(387

)

Accounts payable

(235

)

3,547

Due to related parties

(780

)

—

Accrued expenses and other current liabilities

11,660

148

Net cash used in operating activities

(24,841

)

(1,725

)

Investing activities

Acquisition of Manitoba Harvest, net of cash acquired

(109,057

)

—

Acquisition of Natura, net of cash acquired

(15,083

)

—

Investment in ABG Profit Participation Arrangement

(33,333

)

—

Increase in deposits and other assets

—

(195

)

Purchases of short-term and non-current investments

(2,914

)

(29,624

)

Proceeds from maturities of short-term investments

—

118

Purchases of property and equipment

(9,017

)

(12,856

)

Purchases of intangible assets

(92

)

(227

)

Net cash used in investing activities

(169,496

)

(42,784

)

Financing activities

Repayment under Privateer Holdings debt facilities

—

(95

)

Advances under Privateer Holdings construction facilities

—

1,536

Minimum lease payments under capital lease

(187

)

(171

)

Proceeds from exercise of stock options

931

—

Proceeds from issuance of convertible preferred stock, net

—

52,640

Net cash provided by financing activities

744

53,910

Effect of foreign currency translation on cash and cash equivalents

543

416

Cash and cash equivalents

(Decrease) increase in cash and cash equivalents

(193,050

)

9,817

Cash and cash equivalents, beginning of period

487,255

2,323

Cash and cash equivalents, end of period

$

294,205

$

12,140

Supplemental Disclosure for Cash Flow Information

Cash paid for interest

$

73

$

242

Non-cash investing activities

Acquisition of Manitoba Harvest

$

195,407

$

—

Acquisition of Natura

$

38,980

$

—

Investment in ABG Profit Participation Arrangement, net of receivable

$

94,805

$

—

Non-cash financing activities

Shares issued for employee compensation

$

649

$

—

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Tilray, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except for shares and per share amounts, unaudited)

1.

Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements (the “financial statements”) reflect the accounts of Tilray, Inc. and its wholly owned subsidiaries (collectively “Tilray”, the “Company”, “we”, “our”, or “us”). The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all the information and footnotes required for annual financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018 (the “Annual Financial Statements”).

These financial statements reflect all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the three months ended March 31, 2019 and 2018 are not necessarily indicative of results that can be expected for the full year.

The Condensed Consolidated Statement of Net Loss and Comprehensive Loss for the three months ended March 31, 2018 were reclassified to conform to the current period’s presentation. Specifically, depreciation and amortization expense as well as acquisition and integration expenses, which were formerly presented as part of general and administrative expenses, are now presented separately.

Other than as described below, there have been no changes to our significant accounting policies described in our Annual Financial Statements that had a material impact on our financial statements and related notes.

Business combinations and goodwill

The Company accounts for business combinations using the acquisition method in accordance with ASC 805 “Business Combinations,” which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition. Any excess of the purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions, including fees for accounting, legal, professional consulting and valuation specialists, are expensed as incurred. Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

For business combinations achieved in stages, the Company’s previously held interest in the acquiree is remeasured at its acquisition date fair value, with the resulting gain or loss recorded in the Consolidated Statements of Net Loss and Comprehensive Loss. For a pre-existing relationship between the Company and acquiree that is not extinguished on the business combination, such a relationship is considered effectively settled as part of the business combination even if it is not legally cancelled. At the acquisition date, it becomes an intercompany relationship and is eliminated upon consolidation.

The estimated fair value of acquired assets and assumed liabilities are determined primarily by using a discounted cash flow approach, with estimated cash flows discounted at a rate that the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. Contingent consideration in a business combination is remeasured at fair value each reporting period until the contingency is resolved and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in the Consolidated Statements of Net Loss and Comprehensive Loss.

Intangible assets

The Company records intangible assets acquired at cost, net of accumulated amortization and accumulated impairment losses, if any. Cost is measured based on the fair values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired in a business combination is its acquisition date fair value.

5

Amortization of definite life intangible assets is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Customer relationships

14 to 16 years

Developed technology

10 years

Website

3 years

Supply contract

3 years

Licenses

2 years

The Company has rights under the ABG Profit Participation Arrangement and trademarks with indefinite life. Intangible assets that are determined to have an indefinite life are not amortized, but tested for impairment annually or more frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-life intangible asset is impaired by the amount of the excess.

Stock-based payments

Fully vested, non-forfeitable equity instruments issued to parties other than employees are measured on the date they are issued where there is no specific performance required by the grantee to retain those equity instruments. Share-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Where fully vested, non-forfeitable equity instruments are granted to parties other than employees in exchange for notes or financing receivable, the note or receivable is presentedin additional paid-in capital on the Consolidated Balance Sheets.

Impairment of goodwill and indefinite life intangible assets

Goodwill and indefinite life intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value is conducted.

Significant estimates and judgments

The preparation of the Company’s financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of revenue, expenses, assets, liabilities, accompanying disclosures and the disclosure of contingent liabilities. These estimates and judgments are subject to change based on experience and new information. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. Estimates and judgments are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. Financial statement areas that require significant estimates and judgments are as follows:

Business combinations – The Company uses judgment in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value is typically estimated using the present value of future discounted cash flows, an income approach. Significant estimates in the discounted cash flow model primarily include the discount rate, rates of future revenue growth and profitability of the acquired business, and working capital effects. The discount rate considers the relevant risk associated with business-specific characteristics and the uncertainty related to the ability to achieve the projected cash flows. These estimates and the resulting valuations require significant judgment.

Contingent consideration – Contingent consideration is subject to measurement uncertainty as the financial impact will only be confirmed by the outcome of a future event. The assessment of contingent consideration involves a significant amount of judgment, including determining a reliable estimate of the amount of cash outflow required to settle the obligation based on significant unobservable inputs as well as estimates around the probability and timing of satisfying the future events on which the contingent consideration is based.

Asset impairment – Asset impairment tests require the allocation of assets to asset groups, which requires significant judgment and interpretation with respect to the integration between the assets and shared resources. Asset impairment tests require the determination of whether there is an indication of impairment. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information.

6

Stock-based payments – Stock-based payment transactions are measured and recognized based on estimated fair value, which requires judgment in determining the appropriate valuation model and assumptions, including discount for shares not registered with the Securities Exchange Commission (“SEC”) subject to transfer restrictions.

Imputed interest for loans receivable – In connection with the loans obtained as part of the ABG Profit Participation Arrangement, judgment is required to estimate the prevailing market interest rate at each time a loan is issued.

New accounting pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue recognition. Further, the FASB issued a number of additional ASUs regarding the new revenue recognition standard. The new standard, as amended, will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which amends ASU 2014-09 to defer the effective date by one year. For public companies, the new standard is effective for annual reporting periods beginning after December 31, 2017, including interim periods within that reporting period. For all other entities, including emerging growth companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2014-09 for the annual financial statements for the year ended December 31, 2019.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. For public companies, the new standard is effective for annual periods beginning after December 15, 2017, including interim periods within the fiscal year. For all other entities, including emerging growth companies, ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-01 for the annual financial statements for the year ended December 31, 2019.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (1) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (2) eliminates most real estate specific lease provisions, and (3) aligns many of the underlying lessor model principles with those in the new revenue standard. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public companies, the new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2018. For all other entities, including emerging growth companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 2020. Earlier application is permitted. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-02 for the annual financial statements for the year ended December 31, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require financial institutions and other organizations to use forward-looking information to better formulate their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. This update will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is evaluating the impact on the financial statements and expects to implement the provisions of ASU 2016-13 for the annual financial statements for the year ended December 31, 2021.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). ASU 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact on the financial statements and expects to implement the provisions of ASU 2018-13 as of January 1, 2020.

2.

Investments

The classification of investment in equities reported in long-term investments on the Condensed Consolidated Balance Sheets is summarized as follows:

March 31, 2019

December 31, 2018

Investment in equities under available-for-sale method

$

3,268

$

1,845

Investment in equities under the cost method

16,382

15,066

Total investment in equities

$

19,650

$

16,911

7

Total unrealized gain recognized in other comprehensive income related to long-term available-for-sale equity securities from initial recognition until March 31, 2019 was $1,396 (2018 - nil).

3.

Fair Value Measurement

The Company complies with ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Quoted prices

in active

markets for

Other

Significant

identical

observable

unobservable

assets

inputs

inputs

(Level 1)

(Level 2)

(Level 3)

Total

March 31, 2019

Cash equivalents

$

197,011

$

—

$

—

$

197,011

Investments

Treasury bills

30,559

—

—

30,559

Money market fund

670

—

—

670

Investment in equities under available-for-sale method

2,420

848

—

3,268

Total investments

33,649

848

—

34,497

Contingent consideration

—

—

(49,214

)

(49,214

)

Total

$

230,660

$

848

$

(49,214

)

$

182,294

December 31, 2018

Cash equivalents

$

203,761

$

—

$

—

$

203,761

Investments

Treasury bills

30,335

—

—

30,335

Investment in equities under available-for-sale method

1,163

682

—

1,845

Total investments

31,498

682

—

32,180

Total

$

235,259

$

682

$

—

$

235,941

At March 31, 2019, the carrying amount of cash equivalents, which include money market fund, corporate bonds, commercial paper and treasury bills, includes an unrealized loss of $12 (March 31, 2018 – nil), recorded in comprehensive loss. Contingent consideration is recorded within accrued expenses and other current liabilities and reflects the consideration for: (i) the acquisition of Manitoba Harvest payable in Class 2 common stock contingent on revenues earned in 2019, and (ii) the acquisition of Natura payable in Class 2 common stock contingent on production levels. Refer to Note 13 for details. There were no transfers between fair value measurement hierarchy levels during the three months ended March 31, 2019.

4.

Inventory

Inventory is comprised of the following items:

March 31, 2019

December 31, 2018

Raw materials

$

11,114

$

2,132

Work-in-process

31,152

12,812

Finished goods

6,446

1,267

Total

$

48,712

$

16,211

8

Inventory is written down for any obsolescence or when the net realizable value of inventory is less than the carrying value. For thethree months ended March 31, 2019, the Company recorded write-downs within work-in-process of $1,626 in cost of sales.There were no write-downs in cost of sales for the comparable period in 2018.

5.

Property and Equipment, Net

Property and equipment, net consists of the following:

March 31, 2019

December 31, 2018

Land

$

5,715

$

4,498

Buildings and leasehold improvements

75,502

51,111

Laboratory and manufacturing equipment

20,164

6,131

Office and computer equipment

3,754

970

Assets under capital lease

9,981

9,661

Construction in process

23,011

15,343

138,127

87,714

Less: accumulated depreciation and amortization

(9,164

)

(7,500

)

Total

$

128,963

$

80,214

For the three months ended March 31, 2019, $305 depreciation expense related to general office space and equipment (March 31, 2018 – $29). In addition, $999 of depreciation expense was included in cost of sales relating to manufacturing equipment and production facilities (March 31, 2018 – $ 372) with the remaining depreciation included in inventory.

No capitalized interest was included in construction-in-progress for the three months ended March 31, 2019 (2018 – $134).

The Company had $46,333 in property and equipment additions related to building and leasehold improvements, laboratory and manufacturing equipment, office and computer equipment and construction during the three months ended March 31, 2019 (2018 – $11,248). Additions to building and leasehold improvements primarily related to the Company’s acquisitions of Manitoba Harvest and Natura. Refer to Note 13 for details. Additions to construction in process primarily relate to the ongoing construction of the Company’s London, Ontario and Portugal facilities.